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Comment: Converging on boom-time profits without a boom – the big four now and then

They say averages lie, though in my experience not as much as people, but producing an annual report with 2,000 data points as we do with this month’s LB100 means it can be hard even for professional anoraks such as myself to find the nuggets of meaning in the thickets of information.

Well, when in doubt I start with the market leaders, so I dug up the numbers on London’s big four in their peak of 2008 to compare against this year’s results to see how they have changed.

The most obvious point: London’s leaders are not growing. In 2008 the four firms earned £4.81bn, by 2014 that figure had only edged up to £5.08bn, and that growth was largely down to one firm, with Allen & Overy (A&O) increasing its income by over £200m.

Clifford Chance (CC) stands out as having most radically overhauled its business since the banking crisis. While revenue and profit per equity partner (PEP) are flat over the period, lawyer headcount is down by 637 since 2008, 18% of its boom-time fee-earner base. Equity partnership has remained stable but salaried ranks trimmed and the fall in leverage backs a dramatic rise in the fees generated per lawyer, rising 24% over the period to £461,000. CC is also notable for reshaping its business away from the UK, generating £469m in London in 2013/14, £79m less than 2008.

Such tactics are likewise evident at Linklaters, which has 388 fewer lawyers – including shedding 15% of its partnership. As with CC you see a sharp fall in UK income and a notable upswing in productivity. Revenue and PEP are stable.

A&O stands out as being the only practice not clearly in margin management mode, with revenues growing 21% over the period, while equity partnership expands from 362 to 444 and headcount rises modestly. The firm has also achieved a dramatic increase in revenue per lawyer, from £404,000 to £477,000.

Freshfields Bruckhaus Deringer is the most stable of the group, achieving a comparable income and PEP in 2008 and 2014 with only modest changes to its practice model, and remaining the most productive, though the gap has narrowed.

This is clear convergence within the group, whose business models and economics have never been closer. In 2008 there was £313m in income between the highest and lowest earning member of the big four – now the figure is just £127m. Since 2008 the group has striven to match each other on fees per lawyer. The top performer then generated £121,000 more in fees per lawyer than the worst of the quartet, now the gap is just £60,000. The big four have been likewise highly adept at wringing more revenue out of smaller teams, even compared to their credit-boom highs. The group has clearly shifted focus from the UK, losing some market share in the process.

Though it may look like it, this isn’t stasis – beneath the surface the four are striving to reposition themselves globally, slash costs and boost underlying productivity. This was hard, sometimes ruthless management. This doesn’t solve all the group’s strategic issues but these numbers show the four positioned for a startling rise in profitability if the market recovers. Well, they certainly sweated for it.